A computable general equilibrium analysis of the relative price sensitivity required to induce rebound effects in response to an improvement in energy efficiency in the UK economy

View/Open

Date

Author

Metadata

Abstract

In recent years there has been extensive debate in the energy economics and policy
literature on the likely impacts of improvements in energy efficiency. This debate has focussed on the notion of rebound effects. Rebound effects occur when improvements
in energy efficiency actually stimulate the direct and indirect demand for energy in
production and/or consumption. This phenomenon occurs through the impact of the
increased efficiency on the effective, or implicit, price of energy. If demand is
stimulated in this way, the anticipated reduction in energy use, and the consequent
environmental benefits, will be partially or possibly even more than wholly (in the case
of ‘backfire’ effects) offset. A recent report published by the UK House of Lords
identifies rebound effects as a plausible explanation as to why recent improvements in
energy efficiency in the UK have not translated to reductions in energy demand at the macroeconomic level, but calls for empirical investigation of the factors that govern the
extent of such effects.
Undoubtedly the single most important conclusion of recent analysis in the UK, led by the UK Energy Research Centre (UKERC) is that the extent of rebound and backfire
effects is always and everywhere an empirical issue. It is simply not possible to
determine the degree of rebound and backfire from theoretical considerations alone,
notwithstanding the claims of some contributors to the debate. In particular, theoretical analysis cannot rule out backfire. Nor, strictly, can theoretical considerations alone rule out the other limiting case, of zero rebound, that a narrow engineering approach would imply.
In this paper we use a computable general equilibrium (CGE) framework to investigate
the conditions under which rebound effects may occur in the Scottish regional and UK
national economies. Previous work has suggested that rebound effects will occur even where key elasticities of substitution in production are set close to zero. Here, we carry out a systematic sensitivity analysis, where we gradually introduce relative price
sensitivity into the system, focusing in particular on elasticities of substitution in
production and trade parameters, in order to determine conditions under which rebound
effects become a likely outcome. We find that, while there is positive pressure for
rebound effects even where (direct and indirect) demand for energy is very price
inelastic, this may be partially or wholly offset by negative income and disinvestment
effects, which also occur in response to falling energy prices.